Monday, February 23, 2015

Finally touched by changes in Petroleum World

The world of petroleum is undergoing discontinuous change again and will yield a landscape very different from the one we are leaving behind. In its wake geopolitics especially of the Middle East will be transformed. I have chosen for it to touch the retail consumer here before blogging about it.

In many countries, governments have taken the opportunity to cut subsidies this time instead of passing lower prices to consumers. We have just done the moral equivalent here.

Both Warren Buffett and George Soros had been caught flat footed especially the former who unloaded his entire stake of $3.7 billion worth of Exxon/Mobil stock. On the other hand he is adding to his big hoard of IBM stock.

The status quo is gone when people recognize that the USA instead of Saudi Arabia is the new swing crude oil producer. As America reliance on imported oil decline it would along with that transform its foreign policy. The Middle East face a period of rising uncertainty and volatility at a time when China as a strategic oil consumer cannot contribute much to stability. Russia the largest oil producer remains unpredictable since it cannot count on steady oil revenues to finance its budget. In short, the price of oil has a ceiling much lower than the sky probably for many years.

At what point would the Saudis and other lowest cost producers choose to just pump till kingdom come? It is rational to dump oil and grab market share if they believe in a diversified energy sources scenario currently unfolding. Better to trade the increasingly less valuable black gold for other forms of wealth before proverbially nobody wants them. The limited ability of our atmosphere to carry carbon will eventually capped demand for oil as an energy source. Of course I am probably speculating too far into the future. If the Saudis dump, Russia will lose money for every barrel they pump. Sounds like opening Pandora's box of trouble to me.

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